HOLDER IN DUE COURSE -

NEGOTIABLE
INSTRUMENTS
Holder in Due Course - Negotiable
Instruments
Sec. 52. What constitutes a holder in due course. - A holder in due
course is a holder who has taken the instrument under the following
conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without
notice that it has been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it.

PRESUMPTION HOLDER IN DUE COURSE

• Generally, every holder is prima facie a holder in due course
• Any one, therefore, who claims otherwise must prove that the holder in
question acquired the instrument with one or more of the conditions lacking
• Any holder proved to have taken an instrument with one of the
conditions enumerated lacking is not a holder in due course

ACQUISITION BEFORE THE INSTRUMENT IS

OVERDUE
• The holder of the instrument must have become the holder before the
instrument has become overude
• Illustrations—
o One who has purchased 2 promissory notes without the
necessary indorsement on the part of the holder after
payment thereof had already been one year overdue and
without having made inquiries about the solvency of the makers cannot be
considered as a holder in due course
o One taking past due paper is chargeable with notice of all
equities between the original parties but nbt with equities between
intermediate indorsers
o If the instrument is overdue, it is also a notice that it has been
dishonored

WHEN INSTRUMENT IS OVERDUE

• When it after the date of maturity
• On the date of maturity, the instrument is not overdue and a holder
who acquires the instrument on that date is a holder in due course
• If the instrument is overdue, there might be something wrong with the
instrument

AS TO ACCELERATED INSTRUMENTS
• When the instrument contains an acceleration clause, knowledge of
the holder at the time of acquisition thereof that one installment or
interest, or both, as the case may be, is unpaid, is notice that the
instrument is overdue

AS TO INTEREST
• One who purchases in good faith an instrument upon which the
interest is overdue is a holder in due course
• But where by the terms of the instrument, the principal was to become
due upon default of the payment of instrument, then one who takes
the instrument upon which the interest is overdue is not a holder in due
course

WHAT IS AN ACQUISITION IN GOOD FAITH?

• Good faith refers to the indorsee or transferee and not to the seller of the
paper

• Taking in good faith means that he doesn't have any knowledge of fact
which would render it dishonest for him to take a particular piece of
negotiable paper

MEANING OF HOLDER IN GOOD FAITH

• Holder without knowledge or notice of equities of any sort which could be set
up against a prior holder of an instrument

EFFECT OF FAILURE TO MAKE INQUIRY

• Ordinarily, failure to inquire after notice merely sufficient to cause a
person of ordinary prudence to make inquiry as to an infirmity in a
negotiable instrument and defect in the holder’s title, is not evidence of
purchaser’s bad faith so as to bar him from recovery
• TEST OF HONESTY—whether or not his purpose is dishonest?

WHEN FAILURE TO MAKE INQUIRY IS INDICIA OF

BAD FAITH?
• Failure to make inquiry when circumstances strongly indicate defect,
renders the holder not a holder in due course

ACQUISITION FOR VALUE

• Where the holder gave no valuable consideration for the transfer of the
instrument to him, he cannot be a holder in due course
• Discounting of a negotiable instrument is still considered to be taking for
value

EFFECT OF INADEQUACY OF INSTRUMENT

• Generally, lesion or inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue influence
• It may be an evidence of fraud
• An amount paid for an instrument if a trifling sum should be a red flag and
may by itself establish notice

ACQUISITION WITHOUT NOTICE OF DEFECT OF

TITLE OR OF INFIRMITY
• The following may be chargeable with notice—one taking an
instrument which is overdue; and one acquiring an instrument for a grossly
inadequate consideration

GOOD FAITH MEANS LACK OF NOTICE OF DEFECT OR INFIRMITY

DEFECTS OF TITLE
• All those situations which at common law were known as equitable
defenses and also to cover those equities of ownership where there was
breach of faith in negotiation
• Examples?
o Acquisition of the instrument by fraud
o Acquisition of the instrument by force, duress or fear
o Acquisition of the instrument by unlawful means
o Acquisition of the instrument by for an illegal consideration
o Negotiation of the instrument in breach of faith
o Negotiation of the instrument under circumstances which amount to
fraud

DEFENSES
• Include those common law defenses outside those covered in Section 55
• These include mistake, absence and failure of consideration covered in
Section 28, minority and other forms of incapacity, lack of authority of an agent

INFIRMITIES
• Things that are wrong with the instrument itself
• What are these?
o Wrong date inserted where the instrument is expressed to be payable at a
fixed period after sight is undated
o Filling up a blank instrument not strictly in accordance with the
authority given or not within authority given or not within
the reasonable time, where it was delivered wanting in a material alteration
o Filling up without authority an incomplete and undelivered instrument
o Lack of valid and intentional delivery
o Forgery
o Material alteration

MAY A PAYEE BE A HOLDER IN DUE COURSE?

• Yes, if he satisfies the requirements as set forth in Section 52

MAY A DRAWEE BE A HOLDER IN DUE COURSE?

• A holder refers to one who has taken the instrument as it passes along in the
course of negotiation towards the drawee and not the drawee, who, on the
acceptance and payment of the instrument, thereby strips the instrument of all
negotiability and reduces it to a mere voucher or proof of payment
Sec. 53. When person not deemed holder in due course. - Where an
instrument payable on demand is negotiated on an unreasonable
length of time after its issue, the holder is not deemed a holder in due
course.

WHAT CONSTITUTES UNREASONABLE LENGTH OF

TIME?
• Jurisprudence doesn't state an exact period, nonetheless, there is
practically no authorities hold that a reasonable time for negotiating a demand
note could be extended beyond a year

Sec. 54. Notice before full amount is paid. - Where the transferee receives
notice of any infirmity in the instrument or defect in the title of the person
negotiating the same before he has paid the full amount agreed to be paid
therefor, he will be deemed a holder in due course only to the extent of the
amount therefore paid by him.

Sec. 55. When title defective. - The title of a person who negotiates an
instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud, duress, or
force and fear, or other unlawful means, or for an illegal consideration, or
when he negotiates it in breach of faith, or under such circumstances as
amount to a fraud.

DEFECTIVE TITLE IN GENERAL

• In the acquisition or negotiation thereof

Sec. 56. What constitutes notice of defect. - To constitutes notice of

an infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated must have
had actual knowledge of the infirmity or defect, or knowledge of such facts
that his action in taking the instrument amounted to bad faith.

NOTICE OF DEFECT IN GENERAL

To constitute a notice of defect or infirmity, the holder must have actual
knowledge either:
1. Of the defect or infirmity
2. Or of facts that his action in taking the instrument amounts to bad faith

ACTUAL KNOWLEDGE
• Actual knowledge is required and not mere suspicion, surmise or fear

TAKING AMOUNTING TO BAD FAITH

• Bad faith consists in guilty knowledge, or willful ignorance, showing a vicious
or evil mind
• While mere suspicion is not enough, where there is knowledge of
suspicious circumstances, coupled with means of verifying them, taking the
instrument may amount to bad faith

Sec. 57. Rights of holder in due course. - A holder in due course

holds the instrument free from any defect of title of prior parties,
and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount
thereof against all parties liable thereon.

RIGHTS OF A HOLDER IN DUE COURSE

1. He may sue on the instrument in his won name
2. He may receive payment and if the payment is in due course, the instrument
is discharged
3. He holds the instrument free from any defect of title of prior
parties and free from defenses available to prior parties among themselves
4. And he may enforce payment of the instrument for the full amount
thereof against all parties liable thereto

LEGAL AND EQUITABLE DEFENSES

• The holder in due course is free from equitable defenses only

AN ALTERATION MAY BE A REAL OR PERSONAL

DEFENSE. WHY?
• An alteration irrespective of original tenor, it can be enforced—real
• Irrespective of difference between original and altered tenor, can collect
only limited amount—personal

EQUITABLE OR PERSONAL DEFENSES

• Those which grow out of the agreement or conduct of a particular
person in regard to the instrument which renders it inequitable for him,
though holding legal title, to enforce it against the defendant, but which are not
available against bona fide purchasers for value without notice

LEGAL OR REAL DEFENSE

• Attach to the instrument itself and can be set up against the whole
world, including a holder in due course
• The right sought to be enforced has never existed or ceased to exist
• Defense against everybody

THE INSTRUMENT SUBJECT TO A REAL DEFENSE CAN STILL B

E
ENFORCED. IT CANNOT BE ENFORCED WITH REGARD THE PERSON
TO WHOM THE LEGAL DEFENSE IS AVAILABLE.

BETWEEN WHOM DEFENSE CAN BE RAISED IN

NOTES
• In general, the defense of want of consideration may only be raised
between immediate parties
• But this could be raised in the instance that the holder has notice of the
want in consideration

BETWEEN WHOM DEFENSE MAY BE RAISED IN

BILLS
• The want or failure of consideration may be interposed in an action
brought by the payee against the drawer or by the indorsee against the
payee indorsing, or by the drawer against the acceptor, but not in an action
between the payee and acceptor
• In the latter case, the defense is available only if there is no
consideration received by the defendant for his liability and plaintiff must
have given no consideration for his title

WANT OF DELIVERY OF COMPLETE INSTRUMENT

• Where the instrument is mechanically complete and is not wanting in any
material particular, want of delivery is an equitable defense
• As against holders not in due course, it can be shown that no delivery was
made, or that the delivery was conditional or for a special purpose
• Where the instrument is stolen, the defense is also equitable
• But where the instrument is payable to order, it is a real defense—for the
person would have to commit forgery on the instrument
FRAUD IN INDUCEMENT IS A PERSONAL OR
EQUITABLE DEFENSE
• Relates to the quantity, quality, value or character of the consideration of the
instrument

FOR MISTAKE TO INVALIDATE CONSENT

• It should refer to the substance of the thing which is the object of the
contract, or those conditions which have principally moved one or both parties to
enter into the contract

FRAUD IN FACTUM OR FRAUD IN ESSE

CONTRACTUS IS A LEGAL DEFENSE
• This fraud exists in those cases which a person without negligence has
signed an instrument which was in fact a negotiable instrument but
was deceived as to the character of the instrument and without knowledge
of it
• Essential element is that the maker or indorser, as the case may be, must
have exercised ordinary diligence and in no manner contributed negligently to the
imposition

MINORITY IS A LEGAL DEFENSE ONLY AVAILABLE TO THE MINOR

WHERE THE CORPORATION IS ABSOLUTELY PROHIBITED FROM ISSU

ING ANY NEGOTIABLE INSTRUMENT, THE PAPER CANNOT BE ENFORCED
EVEN BY A HOLDER IN DUE COURSE

WHERE THE CONTRACT OR INSTRUMENT ITSELF IS MADE VOID BY

STATUTE, THE ILLEGALITY OF THE INSTRUMENT IS A REAL DEFENSE

Sec. 58. When subject to original defense. - In the hands of any

holder other than a holder in due course, a negotiable instrument is
subject to the same defenses as if it were non-negotiable. But a
holder who derives his title through a holder in due course, and
who is not himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in respect of all
parties prior to the latter.

RIGHTS OF A HOLDER NOT IN DUE COURSE

1. He may sue on his own name
2. He may receive payment and if the payment is in due course, the instrument
is discharged
3. He holds the instrument subject to the same defenses as if it were non-
negotiable
4. But a holder not in due course who derives his title from a holder
in due course and who isn’t a party himself to any fraud or illegality
affecting the instrument, has all the rights of such former holder in respect of
parties prior to the latter

THE HOLDER ACQUIRING FROM A HOLDER IN DUE COURSE HAS TH

E
BURDEN OF PROOF TO SHOW PREDECESSOR IS INDEED A HOLDER
IN DUE COURSE

Sec. 59. Who is deemed holder in due course. - Every holder is

deemed prima facie to be a holder in due course; but when it is
shown that the title of any person who has negotiated the instrument
was defective, the burden is on the holder to prove that
he or some person under whom he claims acquired the title as
holder in due course. But the last-mentioned rule does not apply in favor of
a party who became bound on the instrument prior to the acquisition of
such defective title.

IN WHOSE FAVOR PRESUMPTION ARISES

• In order to be a holder, he must be in possession of the note or the bearer
thereof

WHEN PRESUMPTION ACCRUES

• It is presumed that the holder acquired the note under all the
circumstances required under Section 52
• Before the presumption arises, he must prove that he is the holder of
the instrument, that is, that he is the indorsee in possession of the
instrument, as it is payable to order

WHEN BURDEN IS SHIFTED

• When it is shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove that he
or some under whom he claims, acquired the title as holder in due
course

THE PRESUMPTION IS NOT APPLICABLE WHEN THE HOLDER’S TITLE

WAS DEFECTIVE OR SUSPICIOUS
FORGERY OF SIGNATURE
IN NEGOTIABLE
INSTRUMENTS
Sec. 23. Forged signature; effect of. - When a signature is forged or
made without the authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under
such signature, unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority.

FORGERY, DEFINED AND EXPLAINED

 Counterfeit making or fraudulent alteration of any writing, and may
consist in the signing of another’s name, or the alteration of an
instrument, in the name, amount, description of the person and the like,
with the intent to defraud
 Section 23 only applies to forged signatures or signatures made
without the authority of the person whose signature purports it to be

FRAUD AMOUNTING TO FORGERY

 Fraud in factum or fraud in esse contractus
 There is no intention to issue an instrument

FRAUDULENT IMPERSONATION
• Suppose X represents himself as Juan Cruz when he is not to Y. Due to
such misrepresentation, he obtained from Y a note payable to the order of Juan
Cruz. If Y intends that the proceeds of the note will go to the real Juan Cruz and
not X, but to whom Y issued the note on the belief that X was Juan Cruz, would
be a forgery.

DOUBLE INTENT IN FRAUDULENT IMPERSONATION

1. He intends to make the instrument payable to the person before him
or to the person writing at the other end of the line, in case the
negotiation is by correspondence
2. He intends to make the instrument payable to the person whom he
believes the stranger to be
GENERAL RULE IN FRAUDULENT IMPERSONATION
• The first one is the controlling intent except where the name of the
payee was already known to the maker or drawer or was particularly identified in
some manner

REASON FOR RULE: THEORY OF ACTUAL INTENT

• Throws the loss on the drawer
• In the absence of anything to show that the drawer had any doubt as
to the identity of the person to whom he delivered the paper as payee—
the drawee, in paying the paper, or the holder, in taking it upon the
indorsement of the impostor in the name of which the payee was described,
carries out the intention that the drawer entertained at
the time of delivery of the paper to the impostor, although that intention
was conceived in consequence of the fraud of the impostor as
to his identity and ownership of the property which represented the
consideration

ANOTHER REASON FOR THE RULE: THEORY OF

ESTOPPEL
• As between two innocent persons, the one whose act was the cause of the
loss should bear the consequences
• It was the drawer’s duty to use diligence to ascertain the identity of
the party with whom he has dealt. Failing to make this discovery, he became the
victim of the fraud. The impostor having succeeded in this
first and essential step in the practice of the fraud, the next was
comparatively an easy one.

RULE IS QUALIFIED WHERE IMPOSTOR REPRESE

NTS HIMSELF AS AGENT OF PAYEE
• There is a distinction between cases where the paper is delivered to
the impostor as payee, in the belief that he is the person to whom the instrument
it would be paid, and cases where the paper is delivered to the impostor upon his
representation, in the belief that he is agent of the person named as payee
• The loss falls on the drawee or purchaser, as the case may be, rather than
on the drawer where the impostor upon whose indorsement the paper was
purchased or paid, represented himself to be the agent of
the payee and not the payee himself

ADMISSION OF GENUINENESS AND DUE EXECUTION

• When an action or defense is founded upon a written instrument such as a
negotiable instrument, copied in or attached to the corresponding
pleading, the genuineness and due execution of the instrument shall
be deemed admitted unless specifically denied under oath by the adverse
party
• Consequently, the genuineness and due execution of the written
instrument or document copied in or attached to the opponent’s
pleading as the basis of his claim or defense, should be denied
specifically under oath, otherwise they are deemed admitted.

MEANING OF ADMISSION OF GENUINENESS AND

DUE EXECUTION
1. That he signed it or that it was signed by another for him and with his
authority
2. That at the time it was signed, it was in words and figures exactly as set out
in the pleading of the party relying upon it,
3. That any formal requisites required by law, such as swearing and
acknowledgment, or revenue stamp which it requires, are waived by him

DEFENSES CUT OFF BY ADMISSION OF

GENUINENESS, ETC.
1. The defense that the signature is a forgery

2. That it was unauthorized, as in the case of an agent signing for his

principal, or one signing on behalf of a partnership or corporation or
that in case of the latter, that the corporation was not authorized under its
charter to sign the instrument
3. That the party charged signed the instrument in some other capacity than
that alleged in the pleading setting it out

FAILURE TO IDENTIFY PROMISSORY NOTE WILL NOT NECESSARILY

DEFEAT CLAIM

EFFECT OF FORGERY IN GENERAL

1. That the signature forged or made without authority is wholly
inoperative
2. That no right to retain the instrument, or to give discharge thereof, or to
enforce payment thereof against any party thereto, can be acquired through or
under such a signature forged or made without authority
3. That nevertheless, as against a party precluded from setting up the
forgery or want of authority, the signature forged or made without
authority is operative, and rights to retain the instrument, to give
discharge therefore, or to enforce payment thereof, can be acquired
through or under the signature forged or made without authority

EXTENT OF THE EFFECT OF THE FORGERY

1. Only the signature forged or made without authority is stated by the
law to be inoperative but neither the instrument itself is, nor the genuine
signatures are, rendered inoperative
2. The instrument can be enforced by holders to whose title over the
instrument the forged signature is not necessary, such as, the indorsement
of an instrument which on its face is payable to bearer
3. The instrument can be enforced against those who are precluded from
setting up the defense of forgery, even against those whose signatures have
been forged

PERSONS PRECLUDED FROM SETTING UP DEFENSE

OF FORGERY
1. Those who warrant or admit to the genuineness of the signature in
question—indorsers, persons negotiating by delivery, and acceptors
2. Those who, by their acts, silence or negligence, are estopped from
setting up the defense of forgery

INDORSERS AS WARRANTORS
• Whether general or qualified
• Warrant that the instrument indorsed by them is genuine in all
respects what it purports it to be

PERSONS NEGOTIATING BY DELIVERY AS

WARRANTORS
• Persons negotiating by mere delivery also warrant that the instrument
negotiated by them is genuine and in all respects what it purports to be
• They are consequently precluded from setting up the defense of
forgery

ACCEPTORS AS WARRANTORS
• A drawee, by accepting the bill, admits the genuineness off the
signature of the drawer

PRECLUDED
• Includes those cases where they are estoppels against the party
desiring to set up the forgery

ESTOPPEL AS TO FORGERY OF INSTRUMENTS

• Whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe that his or another’s
signature in an instrument is genuine, and to act upon such
belief, he cannot, in any litigation arising out of such declaration, act, or omission,
be permitted to set up the forgery of such signature/s
• Estoppel may arise from a declaration, act or omission/negligence

UNREASONABLE DELAY
• Unreasonable delay, after his discovery of the forgery, on the part of one
having the opportunity and duty to speak, in disclosing the forgery upon
commercial paper to the one who ought to be apprised thereof, estops the former
from thereafter asserting the forgery as against the latter where the latter is
prejudiced by such delay or failure
• Requisites:
o That the delay be unreasonable
o That the one who ought to be apprised of the forgery has been
prejudiced

REASONABLY PROMPT NOTICE

• Depends upon the circumstances of the case, and the situation of the
parties with reference to the remedies against any party is a proper
element to enter into the estimate of the reasonableness of the notice

WHEN PREJUDICED AND WHEN NOT PREJUDICED

• A bank is prejudiced—at the time one discovered that his attorney
forged his indorsement to a draft in his favor, it had assets of the
attorney in its possession to protect itself but at the time it was notified of
the forgery, it has parted with such assets
• It is not prejudiced by the delay where at no time after the discovery
of the forgery did the cashier have any property with which to indemnify
the bank

ESTOPPEL BY NEGLIGENCE IN DELIVERY

• A drawer may be precluded from defense of forgery of the payee’s
indorsement if delivery by him to the payee is negligent

CASES OF FORGERY IN GENERAL

1. Forgery of promissory notes which may be further subdivided into—
forgery of indorsement in the note; forgery of the maker’s signature
2. Forgery of bills of exchange which may be further classified into—
forgery of an indorsement on the bill; forgery of the drawer’s
signature, either with acceptance by the drawee, or without such
acceptance but the bill is paid by the drawee

RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT

IN NOT PAYABLE TO ORDER
Where the indorsement is forged and the note is payable to order, the
party whose indorsement is forged and parties prior to him including the
maker cannot be held liable by the holder, whether that holder is a holder in due
course or not:
1. The reason is that, inasmuch as the indorsement is forged, it is
inoperative. But since the note is payable to order, it can be negotiated
only by indorsement completed by delivery, and therefore, the forged instrument
is the only means one could acquire any rights to it or its proceeds
2. The law further provides that no right to retain the note, give
discharge thereof, or enforce payment thereof, could be acquired
through and under the forged signature. Hence the holder didn’t
acquire at least those rights as against the party whose signature is forged
and parties prior to him, including the maker
3. The forger usually obtains possession of the note by fraudulent or
other unlawful means and therefore, he has no right whatsoever in the note

RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT

IN A NOTE PAYABLE TO BEARER
• May be held liable by a holder in due course but not by the one who is not a
holder in due course
• Provided that the note was mechanically complete before the forgery
• Forged instrument is not necessary to the title of a holder since
instruments payable by bearer can be negotiated by mere delivery

RIGHTS OF PARTIES IN FORGERY OF MAKER’S

SIGNATURE
• Where the maker’s signature is forged, he cannot be held liable by any
holder, whether the holder is in due course or not
• Purported maker is not a party to the instrument as his forged
signature is inoperative and no right to retain, enforce, or discharge the
note, may be acquired against him

DRAWEE CANNOT CHARGE ACCOUNT OF DRAWER

• In an action by the drawee against the drawer for the amount charged
by the drawee against the account of the drawer where the drawee
paid a check on a forged indorsement, the drawee has no defense against
the drawer and the drawer may recover from the drawee for an instrument paid
on a forged indorsement
• Depository owes to the depositor an absolute and contractual duty to pay the
check only to the person to whom it is made payable or upon his genuine
indorsement

DRAWER CANNOT RECOVER FROM THE

COLLECTING BANK
• Drawer has no right to recover the amount paid from the collecting
bank as the duty of the collecting to exercise care in collection is due
only to the payee, and as the drawer suffers no loss since it can recover
the amount paid from the drawee bank which has no right to charge the drawer’s
account

DRAWEE CAN RECOVER FROM COLLECTING BANK

• The drawee may recover from the recipient of payment, such as the
collecting bank, under a forged indorsement
• Rule allowing the payee to recover from the recipient of the payment under a
forged indorsement

PAYEE CAN RECOVER FROM RECEIPT OF PAYMENT

• According to the general rule, a bank or other corporation or an
individual, who has obtained possession of a check, upon an
unauthorized or forged indorsement of the payee’s signature and who
collects the amount of the check from the drawee, is liable for the
proceeds thereof to the payee or other owner, notwithstanding that they
have been paid to the person whom the check was obtained
• The possession of the check on the forged indorsement is wrongful and
when the money had been collected on the check, the bank or other person or
corporation, can be held as far as moneys had and received and the proceeds
are held for the rightful owners of the payment and may be recovered by them

COLLECTING BANK BOUND TO SCRUTINIZE CHECKS DEPOSITED WITH IT

TO DETERMINE GENUINENESS AND REGULARITY

CONVERSION
• An unauthorized assumption and exercise of the right of ownership
over goods or personal chattels belonging to another, to the alteration of their
condition or exclusion of the owner’s right

AS AFFECTED BY QUESTION OF DELIVERY TO

PAYEE
• The checks didn’t reach the hands of the payee. The bearing of such
absence of delivery is considered in some cases and held not to be
material
• Where there is no delivery to the payee and no title vests upon him,
he ought not to be allowed to recover on the ground that he lost nothing
because he never became owner of the check and still retained his claim against
the drawer

PAYEE CANNOT RECOVER FROM THE DRAWEE

• An action cannot be maintained by a payee of a check against the
bank on which it is drawn unless the check has been certified or
accepted by the bank on which it is drawn, without acceptance or
certification, as provided by the statute, there is no privity of contract between the
drawee bank and the payee, or holder of the check

RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT

IN BILL PAYABLE TO BEARER
• Holder may recover if he is a holder in due course

RIGHTS OF PARTIES IN FORGERY OF DRAWER’S

SIGNATURE WHERE DRAWEE HASN’T ACCEPTED
BILL BUT PAID IT
• In the case of the payment of a forged check even without former
acceptance, the drawee cannot recover from a holder in due course not
chargeable with any act or negligence or disregard of duty
• As between equally innocent parties, the drawee who pays money on a
check the signature to which is forged, cannot recover the money from the one
who received it

BUT PAYMENT NOT EQUIVALENT TO ACCEPTANCE

OR CERTIFICATION
• The payment of a forged check doesn’t include or imply its acceptance in the
sense that this word is used in Section 62 of NIL
• Basis of the general rule is not that the drawee is precluded from
setting up forgery because, by paying the check, it has accepted the
check and therefore admitted the genuineness of the drawer’s signature

• By paying the check the drawer is presumed negligent or deemed

constructively negligent

NEGLIGENCE IN FORGERY OF INDORSEMENTS IN

BILL
• It presupposes that the drawer himself wasn’t negligent or guilty of
such conduct as would estop him from asserting the forged character
of the indorsement as against the depository and that if he was negligent
or guilty of such conduct, the loss must fall on him

WHERE A DEPOSITOR IS USING ITS OWN PERSONALIZED CHECKS, I

TS
FAILURE TO PROVIDE ADEQUATE SECURITY MEASURES TO PREVEN
T
FORGERIES OF ITS CHECKS CONSTITUTES GROSS NEGLIGENCE AN
D BARS IT FROM SETTING UP THE DEFENSE OF FORGERY

BUT FAILURE OF DEPOSITOR TO MAKE PROMPT RECONCILIATION OF

THE
MONTHLY BANK STATEMENTS FURNISHED BY THE BANK CONSTITUT
ES
NEGLIGENCE FOR WHICH THE BANK CANNOT BE BLAMED IN CASE
DEPOSITOR’S CASE ARE FORGED

BUT DRAWER NOT GENERALLY NEGLIGENT WHERE HIS CHECK IS

STOLEN

PAYEE’S NEGLIGENCE IN FORGERY OF DRAWER’S

SIGNATURE
• The payee in a check may be supposed to have knowledge of the
circumstances under which it is drawn and generally, of the person
drawing it, and is in a better position to judge the genuineness of the paper than
are indorsees.
• And there is a tendency to place greater responsibility upon him and
he is much more likely to be required to return the proceeds of the paper
than are the indorsees

INDORSER’S NEGLIGENCE
• After a draft or check has once been negotiated so that it is in
circulation, there is little opportunity for negligence on the part of those
through whose hands it passes; but as to them, in most cases, the rule will apply
that, as between innocent parties, the loss must fall on the drawee

DUTY OF PURCHASER OF CHECK OR BILL

• One who purchases a bill or check is bound to satisfy himself that the paper
is genuine; and that by indorsing or presenting it for payment or
putting it in circulation before presentation, he impliedly asserts that
he has performed his duty and the drawee who has without actual
negligence on his part, paid the forged demand, may recover the money
paid from such negligent purchaser

PAPER FORWARDED FOR COLLECTION

• The fact that the paper wasn’t cashed and indorsed with unrestricted
indorsement but was taken for collection and forwarded for that purpose
under an indrosement giving notice of that fact, may place a greater burden upon
the drawee than it would otherwise bear

FORGERY OF SIGNATURE IN INSTRUMENT IS FALSIFACTION OF PRIV

ATE DOCUMENT

FORGER NEED NOT IMITATE GENUINE SIGNATURE

• One who signs in the name of another without the latter’s authority, as
drawer in a check, and thereby makes it appear falsely that the alleged
drawer of the check was a real party thereto, when as a matter of fact he didn’t
participate in the transaction, is guilty of falsification

COMMERCIAL DOCUMENTS
• Documents or instruments which are used by businessmen or
merchants to promote or facilitate trade or credit transactions

HOLDER IN DUE COURSE -

NEGOTIABLE
INSTRUMENTS
Holder in Due Course - Negotiable
Instruments
Sec. 52. What constitutes a holder in due course. - A holder in due
course is a holder who has taken the instrument under the following
conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without
notice that it has been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it.

PRESUMPTION HOLDER IN DUE COURSE

• Generally, every holder is prima facie a holder in due course
• Any one, therefore, who claims otherwise must prove that the holder in
question acquired the instrument with one or more of the conditions lacking
• Any holder proved to have taken an instrument with one of the
conditions enumerated lacking is not a holder in due course
ACQUISITION BEFORE THE INSTRUMENT IS
OVERDUE
• The holder of the instrument must have become the holder before the
instrument has become overude
• Illustrations—
o One who has purchased 2 promissory notes without the
necessary indorsement on the part of the holder after
payment thereof had already been one year overdue and
without having made inquiries about the solvency of the makers cannot be
considered as a holder in due course
o One taking past due paper is chargeable with notice of all
equities between the original parties but nbt with equities between
intermediate indorsers
o If the instrument is overdue, it is also a notice that it has been
dishonored

WHEN INSTRUMENT IS OVERDUE

• When it after the date of maturity
• On the date of maturity, the instrument is not overdue and a holder
who acquires the instrument on that date is a holder in due course
• If the instrument is overdue, there might be something wrong with the
instrument

AS TO ACCELERATED INSTRUMENTS
• When the instrument contains an acceleration clause, knowledge of
the holder at the time of acquisition thereof that one installment or
interest, or both, as the case may be, is unpaid, is notice that the
instrument is overdue

AS TO INTEREST
• One who purchases in good faith an instrument upon which the
interest is overdue is a holder in due course
• But where by the terms of the instrument, the principal was to become
due upon default of the payment of instrument, then one who takes
the instrument upon which the interest is overdue is not a holder in due
course

WHAT IS AN ACQUISITION IN GOOD FAITH?

• Good faith refers to the indorsee or transferee and not to the seller of the
paper

• Taking in good faith means that he doesn't have any knowledge of fact
which would render it dishonest for him to take a particular piece of
negotiable paper

MEANING OF HOLDER IN GOOD FAITH

• Holder without knowledge or notice of equities of any sort which could be set
up against a prior holder of an instrument

EFFECT OF FAILURE TO MAKE INQUIRY

• Ordinarily, failure to inquire after notice merely sufficient to cause a
person of ordinary prudence to make inquiry as to an infirmity in a
negotiable instrument and defect in the holder’s title, is not evidence of
purchaser’s bad faith so as to bar him from recovery
• TEST OF HONESTY—whether or not his purpose is dishonest?

WHEN FAILURE TO MAKE INQUIRY IS INDICIA OF

BAD FAITH?
• Failure to make inquiry when circumstances strongly indicate defect,
renders the holder not a holder in due course

ACQUISITION FOR VALUE

• Where the holder gave no valuable consideration for the transfer of the
instrument to him, he cannot be a holder in due course
• Discounting of a negotiable instrument is still considered to be taking for
value

EFFECT OF INADEQUACY OF INSTRUMENT

• Generally, lesion or inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue influence
• It may be an evidence of fraud
• An amount paid for an instrument if a trifling sum should be a red flag and
may by itself establish notice

ACQUISITION WITHOUT NOTICE OF DEFECT OF

TITLE OR OF INFIRMITY
• The following may be chargeable with notice—one taking an
instrument which is overdue; and one acquiring an instrument for a grossly
inadequate consideration

GOOD FAITH MEANS LACK OF NOTICE OF DEFECT OR INFIRMITY

DEFECTS OF TITLE
• All those situations which at common law were known as equitable
defenses and also to cover those equities of ownership where there was
breach of faith in negotiation
• Examples?
o Acquisition of the instrument by fraud
o Acquisition of the instrument by force, duress or fear
o Acquisition of the instrument by unlawful means
o Acquisition of the instrument by for an illegal consideration
o Negotiation of the instrument in breach of faith
o Negotiation of the instrument under circumstances which amount to
fraud

DEFENSES
• Include those common law defenses outside those covered in Section 55
• These include mistake, absence and failure of consideration covered in
Section 28, minority and other forms of incapacity, lack of authority of an agent

INFIRMITIES
• Things that are wrong with the instrument itself
• What are these?
o Wrong date inserted where the instrument is expressed to be payable at a
fixed period after sight is undated
o Filling up a blank instrument not strictly in accordance with the
authority given or not within authority given or not within
the reasonable time, where it was delivered wanting in a material alteration
o Filling up without authority an incomplete and undelivered instrument
o Lack of valid and intentional delivery
o Forgery
o Material alteration

MAY A PAYEE BE A HOLDER IN DUE COURSE?

• Yes, if he satisfies the requirements as set forth in Section 52

MAY A DRAWEE BE A HOLDER IN DUE COURSE?

• A holder refers to one who has taken the instrument as it passes along in the
course of negotiation towards the drawee and not the drawee, who, on the
acceptance and payment of the instrument, thereby strips the instrument of all
negotiability and reduces it to a mere voucher or proof of payment

Sec. 53. When person not deemed holder in due course. - Where an
instrument payable on demand is negotiated on an unreasonable
length of time after its issue, the holder is not deemed a holder in due
course.

WHAT CONSTITUTES UNREASONABLE LENGTH OF

TIME?
• Jurisprudence doesn't state an exact period, nonetheless, there is
practically no authorities hold that a reasonable time for negotiating a demand
note could be extended beyond a year

Sec. 54. Notice before full amount is paid. - Where the transferee receives
notice of any infirmity in the instrument or defect in the title of the person
negotiating the same before he has paid the full amount agreed to be paid
therefor, he will be deemed a holder in due course only to the extent of the
amount therefore paid by him.

Sec. 55. When title defective. - The title of a person who negotiates an
instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud, duress, or
force and fear, or other unlawful means, or for an illegal consideration, or
when he negotiates it in breach of faith, or under such circumstances as
amount to a fraud.

DEFECTIVE TITLE IN GENERAL

• In the acquisition or negotiation thereof

Sec. 56. What constitutes notice of defect. - To constitutes notice of

an infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated must have
had actual knowledge of the infirmity or defect, or knowledge of such facts
that his action in taking the instrument amounted to bad faith.
NOTICE OF DEFECT IN GENERAL
To constitute a notice of defect or infirmity, the holder must have actual
knowledge either:
1. Of the defect or infirmity
2. Or of facts that his action in taking the instrument amounts to bad faith

ACTUAL KNOWLEDGE
• Actual knowledge is required and not mere suspicion, surmise or fear

TAKING AMOUNTING TO BAD FAITH

• Bad faith consists in guilty knowledge, or willful ignorance, showing a vicious
or evil mind
• While mere suspicion is not enough, where there is knowledge of
suspicious circumstances, coupled with means of verifying them, taking the
instrument may amount to bad faith

Sec. 57. Rights of holder in due course. - A holder in due course

holds the instrument free from any defect of title of prior parties,
and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount
thereof against all parties liable thereon.

RIGHTS OF A HOLDER IN DUE COURSE

1. He may sue on the instrument in his won name
2. He may receive payment and if the payment is in due course, the instrument
is discharged
3. He holds the instrument free from any defect of title of prior
parties and free from defenses available to prior parties among themselves
4. And he may enforce payment of the instrument for the full amount
thereof against all parties liable thereto

LEGAL AND EQUITABLE DEFENSES

• The holder in due course is free from equitable defenses only

AN ALTERATION MAY BE A REAL OR PERSONAL

DEFENSE. WHY?
• An alteration irrespective of original tenor, it can be enforced—real
• Irrespective of difference between original and altered tenor, can collect
only limited amount—personal

EQUITABLE OR PERSONAL DEFENSES

• Those which grow out of the agreement or conduct of a particular
person in regard to the instrument which renders it inequitable for him,
though holding legal title, to enforce it against the defendant, but which are not
available against bona fide purchasers for value without notice

LEGAL OR REAL DEFENSE

• Attach to the instrument itself and can be set up against the whole
world, including a holder in due course
• The right sought to be enforced has never existed or ceased to exist
• Defense against everybody

THE INSTRUMENT SUBJECT TO A REAL DEFENSE CAN STILL B

E
ENFORCED. IT CANNOT BE ENFORCED WITH REGARD THE PERSON
TO WHOM THE LEGAL DEFENSE IS AVAILABLE.

BETWEEN WHOM DEFENSE CAN BE RAISED IN

NOTES
• In general, the defense of want of consideration may only be raised
between immediate parties
• But this could be raised in the instance that the holder has notice of the
want in consideration

BETWEEN WHOM DEFENSE MAY BE RAISED IN

BILLS
• The want or failure of consideration may be interposed in an action
brought by the payee against the drawer or by the indorsee against the
payee indorsing, or by the drawer against the acceptor, but not in an action
between the payee and acceptor
• In the latter case, the defense is available only if there is no
consideration received by the defendant for his liability and plaintiff must
have given no consideration for his title

WANT OF DELIVERY OF COMPLETE INSTRUMENT

• Where the instrument is mechanically complete and is not wanting in any
material particular, want of delivery is an equitable defense
• As against holders not in due course, it can be shown that no delivery was
made, or that the delivery was conditional or for a special purpose
• Where the instrument is stolen, the defense is also equitable
• But where the instrument is payable to order, it is a real defense—for the
person would have to commit forgery on the instrument

FRAUD IN INDUCEMENT IS A PERSONAL OR

EQUITABLE DEFENSE
• Relates to the quantity, quality, value or character of the consideration of the
instrument

FOR MISTAKE TO INVALIDATE CONSENT

• It should refer to the substance of the thing which is the object of the
contract, or those conditions which have principally moved one or both parties to
enter into the contract

FRAUD IN FACTUM OR FRAUD IN ESSE

CONTRACTUS IS A LEGAL DEFENSE
• This fraud exists in those cases which a person without negligence has
signed an instrument which was in fact a negotiable instrument but
was deceived as to the character of the instrument and without knowledge
of it
• Essential element is that the maker or indorser, as the case may be, must
have exercised ordinary diligence and in no manner contributed negligently to the
imposition

MINORITY IS A LEGAL DEFENSE ONLY AVAILABLE TO THE MINOR

WHERE THE CORPORATION IS ABSOLUTELY PROHIBITED FROM ISSU

ING ANY NEGOTIABLE INSTRUMENT, THE PAPER CANNOT BE ENFORCED
EVEN BY A HOLDER IN DUE COURSE

WHERE THE CONTRACT OR INSTRUMENT ITSELF IS MADE VOID BY

STATUTE, THE ILLEGALITY OF THE INSTRUMENT IS A REAL DEFENSE

Sec. 58. When subject to original defense. - In the hands of any

holder other than a holder in due course, a negotiable instrument is
subject to the same defenses as if it were non-negotiable. But a
holder who derives his title through a holder in due course, and
who is not himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in respect of all
parties prior to the latter.

RIGHTS OF A HOLDER NOT IN DUE COURSE

1. He may sue on his own name
2. He may receive payment and if the payment is in due course, the instrument
is discharged
3. He holds the instrument subject to the same defenses as if it were non-
negotiable
4. But a holder not in due course who derives his title from a holder
in due course and who isn’t a party himself to any fraud or illegality
affecting the instrument, has all the rights of such former holder in respect of
parties prior to the latter

THE HOLDER ACQUIRING FROM A HOLDER IN DUE COURSE HAS TH

E
BURDEN OF PROOF TO SHOW PREDECESSOR IS INDEED A HOLDER
IN DUE COURSE

Sec. 59. Who is deemed holder in due course. - Every holder is

deemed prima facie to be a holder in due course; but when it is
shown that the title of any person who has negotiated the instrument
was defective, the burden is on the holder to prove that
he or some person under whom he claims acquired the title as
holder in due course. But the last-mentioned rule does not apply in favor of
a party who became bound on the instrument prior to the acquisition of
such defective title.

IN WHOSE FAVOR PRESUMPTION ARISES

• In order to be a holder, he must be in possession of the note or the bearer
thereof

WHEN PRESUMPTION ACCRUES

• It is presumed that the holder acquired the note under all the
circumstances required under Section 52
• Before the presumption arises, he must prove that he is the holder of
the instrument, that is, that he is the indorsee in possession of the
instrument, as it is payable to order

WHEN BURDEN IS SHIFTED

• When it is shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove that he
or some under whom he claims, acquired the title as holder in due
course

THE PRESUMPTION IS NOT APPLICABLE WHEN THE HOLDER’S TITLE

WAS DEFECTIVE OR SUSPICIOUS